Buy low, sue high.

Increasingly in the United States, there is a trend toward third-party litigation financing — in other words, allowing a non-participant in a lawsuit to “buy shares” in a plaintiff’s case. In return for this investment, the company or individual will receive a portion of any settlement or award. Before you read further, does this strike you as a good idea? Well…

On the one hand, allowing litigation finance companies to “buy shares” in other people’s lawsuits potentially allows indigent or under-resourced clients to gain access to the legal system. Ideally, everyone with a meritorious lawsuit would be able to pursue that suit; unfortunately, opening the door to the court system takes a lot of money — attorneys at large law firms, for example, are billed out at hundreds of dollars per hour, and litigation costs, such as discovery, add up quickly.

Consequently, when potential complainants are unable to foot the bill for an attorney, they find themselves closed off from seeking justice and redress of wrongs. An individual could seek to represent himself or herself, but such “pro se” litigants are rarely successful given the complicated nature of our legal system. Allowing a litigation finance company, or an investor, to buy shares in a meritorious lawsuit creates a way for injured parties to pursue a claim and avoid being pressured into an early, unsatisfying settlement even if they, by themselves, would be unable to pursue it. Not only does this increase the likelihood of an injured party receiving compensation, but it also adds a deterrent affect for potential offenders.

The aspirational understanding of third-party litigation finance is called into question by actual practices. Many litigation finance companies, and the like, demand extremely large portions of any settlement or award or charge usurious interest rates on any money loaned to a potential litigant. Consequently, the plaintiff, even if he or she does prevail, may not receive anything close to the actual amount awarded. A less meritorious, but often raised objection to third-party financing is that it encourages frivolous lawsuits. It is certainly true that broader financing options will increase the number of lawsuits, but it is less apparent that it will lead to meritless suits — litigation financing companies and investors have a strong incentive to do their homework before offering to provide money.

The United States is steadily moving toward regulating and monitoring the use of third-party litigation financing. Under the status quo, the practice is a little bit troubling given the freedom of litigation financing companies to charge exorbitant rates or demand very high percentages of settlements. Going forward, the practice will probably become both more equitable and more common.